Being rich and being wealthy can be very different things. Interestingly, the literal definitions of “rich” and “wealthy” are almost identical. Being rich is, “possessing material wealth,” or “having an abundant supply of desirable substances.” Being wealthy, on the other hand, is “having an abundant supply of money or possessions of value.” Both have to do with having a lot of something, but there is a major difference. That something is the possession of something of value. In other words, wealthy people own and acquire appreciable assets that make money. Rich people focus on acquiring things that cost money and lose value.

Rich people, generally speaking, are the people that you can tell just by looking at them. They own many expensive cars, have enormous houses, dine at the finest restaurants and spend lavishly. They may have a high income job or acquired a lump sum of money, but either way they spend foolishly and enjoy displaying their high income status rather then accumulating wealth.

Ironically, rich people’s expenses most likely exceed their income, and a quick glance at their financial statement would indicate that they are actually broke. They probably own very few or no assets at all, are heavily in debt and can be characterized as hyper-consumers. Think about the high-class, rich celebrities you hear about that later in life end up auctioning off everything they own and file for bankruptcy. One day they woke up to face reality and find that all of their money is actually gone.

Wealthy people can have the expensive cars and live a lavish lifestyle, but they are less likely to behave like rich people because they are better at managing their money. This group has spent their lives being in the business of acquiring appreciable assets that create passive income streams. They own businesses (which can include stocks), real estate, art and other investments that bring money. The things wealthy people spend their time purchasing are items that are worth more tomorrow, rather than depreciate in value. This allows them to have complete financial freedom and the ability to decide, “I’m don’t have to do any work today because my possessions make more money then I will spend.”

So at what point are you wealthy? Wealth is sort of a subjective thing. You are officially wealthy when your passive income and cash flow exceeds your expenses. It is when you have $3,000 a month in rental income from your real estate properties, but your cost of living is only $2,000 a month. Or the million dollars that you acquired through years of smart investing is now generating $100,000 a year from a 10% return-on-investment asset, but your cost of living is only $60,000 a year. That is when you are wealthy and financially free.

Define for yourself what it means to be wealthy. Maybe you only need $30,000 to live, and once you reach that level of passive income you are happy and consider yourself wealthy. Or maybe you want multiple expensive cars, the big house and a yacht. You can have all of these things and be wealthy when you acquire assets that bring in enough cash flow to pay for the depreciable expenses.

Think about what it means to you to be wealthy and analyze your current situation. Are you acting more like a rich person, with expenses that exceed your income, or are you more like a wealthy person who reserves part of their income to acquire assets before spending any money? Once you’ve decided where you want to be, it’s time to plan how to adjust your behaviors to get you there.